Ten Red Flags to Look for in an ICO

Some ICOs are riddled with red flags! Don't panic; you just need to learn how to recognize them.

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1. Missing documentation

If the ICO doesn’t provide the key documents, such as the whitepaper and the roadmap, that’s a huge warning sign. Without these two documents, you can’t really learn any important information about the ICO.

2. Fake website

While this is not the fault of the ICO you’re analyzing, it’s still a very popular scam. Basically, the scammer makes an exact replica of the ICO’s official website and also uses a very similar URL. Usually, they just change a letter or two and, of course, the wallet address.

An example of a fake webiste for an ICO — look at the URL!

That way you’ll be scammed into transferring your funds to the wrong address (instead of the ICO’s address), and they will be lost. Be careful when you’re visiting the ICO website and make sure you’re on the right URL.

The best and safest bet is to bookmark it!

3. Confusing white paper

The most important document the ICO publishes must be clear, concise, and detailed. There are many white papers out there that go into great details, sometimes even explaining blockchain and cryptocurrencies, but fail to explain what they intend to do with this technology.

So make sure you read the whitepaper in detail — more on that here.

4. Doesn’t make sense on the blockchain

Is the project the ICO is developing solving an actual problem or is the team just jumping on the blockchain train because it’s hot at the moment? Blockchain has been a huge buzzword, and many people are trying to use it to get funds for projects because the word itself makes it more attractive to potential investors.

So think about the implementation of their solution, and it’s usefulness in the real world.

5. Anonymous team

The team is another crucial part of a successful ICO. If the members are not disclosed, it’s a huge red flag. You want to know who you’re »giving« your money to. You want to know who’s behind the project, are they capable of developing the idea and running it after it launches?

6. Unexperienced team

Another red flag that’s related to the team — a team that lacks the technical knowledge and experience in their line of business will most probably not lead the project successfully.

On the other hand — if a big crypto celebrity endorses an ICO or is listed as partner/advisor, that doesn’t necessarily mean you should invest! You need to understand that very often these people are getting paid to do that, so don’t trust them blindly.

7. No hard cap

This is a short an simple one. If the project doesn’t have a set hard cap, it’s a red flag, because that means that the team lacks a solid business plan. They failed to do an analysis of their own project to determine how much money they need for the success of the project right now and in the future.

The second reason behind this scenario is even worse — the team behind an ICO can just be after the money. They don’t set a hard cap because they just want to collect as much money as possible. We don’t need to explain why this is a red flag, right?

8. Large token allocation to the team

An example of a relatively healthy token allocation in an ICO

This relates to the previous point in a way. If the team members have set a large allocation of tokens for themselves (a healthy percentage being from 10 to 25%), they better have a good explanation why they need it — and usually, there is none.

9. No vesting period

If the ICO doesn’t set the vesting period, that’s bad news. That means that the tokens (those distributed to the public or the ones the team owns) can be sold immediately when they become available on the market.

An example of a vesting period

If we’re talking about team members, you’d be right to suspect that they might not stick with the project in the long run. As for investors: if there’s no vesting period, they can dump the tokens and therefore influence the price of the currency.

10. Large bonuses/airdrops

Bounties, bonuses, and airdrops are very popular these days and rightfully so. They engage the community, which is great.

An example of ICO bonus structure

But the problem appears when the ICO promises large bonuses to investors — it shows a questionable sustainability of the project in the future.There’s also a good chance that there’s a pump-and-dump scheme on the side of private investors.

To sum up and repeat the old cliche: do your research and be careful when deciding where to invest!


Watch Tim explain this topic on video:

This article is a part of our ICO Investing 101 series. See all articles or jump to:


The purpose of this article is to provide our readers with relevant information to the best of our knowledge so that our readers can avoid the basic mistakes with investing in ICOs, or at least to save you from some unnecessary headaches. We hope we helped you take the first step towards investing in crypto!

 

 

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DISCLAIMER: This article is for informational and discussion purposes only and does not constitute a marketing message, an investment survey, an investment recommendation, or investment advice. The article was prepared exclusively for a better understanding of market dynamics.

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